Array Technologies Inc. Q1 2023 Earnings Call
And welcome to a very technologies first quarter 2000 twenty-three earnings call.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero and your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Cody Wheeler Investor Relations at Iraq. Please go ahead.
Good evening.
Thank you for joining us on today's conference call to discuss a range of technologies first quarter 2023 results.
Slides for today's presentation are available on the Investor Relations section of our website <unk> Dot com.
This conference call management will make forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties.
Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect.
We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our Investor Relations website.
We do not undertake any duty to update any forward looking statements.
Today's presentation also includes references to non-GAAP financial measures.
You should refer to the information contained in the company's first quarter press release, the definitional information and reconciliation historical non-GAAP measures than a comparable GAAP financial matters.
With that let me turn the call over to Captain Hostettler Technologies' Chief Executive Officer.
Thanks, Cody and welcome everyone.
In addition to Cody I'm also joined by Neil Patel, Our Chief Financial Officer.
Let's begin with slide three four I'll provide some highlights of our first quarter results.
The first quarter with an incredibly strong one for ray.
Revenue profitability and free cash flow, we're all better than expected as the maturity in our operating system allowed us to take advantage of the opportunities that arose in the court.
On the revenue side, we benefited from the minimal number of weather delays during the period, which coupled with a more dynamic demand and logistics planning process allowed us to overdrive revenue to $377 million, representing a 25 per cent growth year over year.
This revenue performance without a gross margin of 26.9%, which is a striking 1800 and 10 basis points better in the first quarter of 2022.
April will discuss in more detail the breakdown of the margin performance this quarter a little later, but.
But this provides another important proof of the maturation of a raise operating system.
It's also important to note that our results. This quarter do not include any increased pricing for domestic content or lower input costs from the 45 X manufacturing crap.
<unk> remain a potential upside once more fully defined.
The improved gross margin and volume increased led to an impressive $67 million adjusted EBITDA, which is up from 700000 in the first quarter of 2022.
And finally, we did another $42 million of free cash flow in the first quarter as we saw our cash conversion cycle improved 38 days from the first quarter of 2022.
This performance leaves us with $148 million of cash on hand, and and other draw revolving credit facility.
Moving to the next slide as I normally do I want to take some time to walk through the current demand environment as it is constantly evolving given the dynamics around iras.
This quarter I will also couple that conversation with how we anticipate these market dynamics to evolve as we move into 2024 and beyond.
I believe it is key to draw this distinction because of much of what we're seeing right now is transitory as we shift from a pre irna world and to the post irna environment.
We are a covered much of this for a number of quarters. So it shouldn't come as a surprise.
2023 is a year, where the industry is setting the foundation for the application of the IRL benefits.
As the value of the benefits and incentives included in the Bill are substantial.
This is going to lead to a boom and solar installations over the next five to 10 years and we are already seeing the beginnings of that pipeline strength.
We have seen discussions moved from individual product awards to portfolio for.
From 12 months discussions of project pipelines to multi year bolted gigawatt pipeline discussions.
To be clear the overall demand landscape is incredibly strong.
However.
While the size of the benefits is undoubtedly a good thing it does create an understandable incentive for our customers to wait for clarity before establishing their supply chain in a manner that would maximize the iras incentives.
This has affected our 2023 and two specific waves.
First.
We have seen a slowdown in the conversion of pipeline orders, which is the driving factor behind the reduction in the order book of approximately $300 million from the prior quarter.
As a reminder, we do not include an order in our order book until the specific project is awarded to array and start date is identified.
And second we have seen some projects getting pushed out to the right as customers are giving themselves more time to evaluate the IRL provision.
As a specific example, one of our largest projects slated for 2023 has been delayed by over a quarter.
So that the finance here and developer could better evaluate how to maximize the return with all of the various irna provisions. This.
This project will get built.
And will use an array track but.
We will now reported less revenue in 2023 10 previously forecasted.
Expectedly these two dynamics limit the upside potential and our previously communicated revenue range.
That would have required an improvement in the project I mean cadence here in the United States.
It is important to note as we look outside of the U S. We are pleased with the progress of our business.
Or international markets are progressing as expected.
And we remain excited about both the near and longer term growth potential.
So despite these near term volume headwinds, we will remain discipline and our product technology and pricing strategy.
We will continue to sell our value on projects that are a good fit for our product and service offerings.
And align well with our desire contracting terms and we won't chase projects that don't meet our profitability criteria just for revenue six.
We believe this is the prudent approach because we don't want to be reactive to short term disruptions on our current path.
Incredibly well positioned for how we believe the market will develop.
Meaning once there is irag clarity, we will see the top of the funnel projects accelerated through the process and project delivery timing will return to a more normalized Kate.
This will lead to increased orders and it will be easier to predict project time.
As we discussed last quarter. This will also mean an expansion of the geographical sites and weather conditions that trackers will be asked to counsel.
This is why our full launch of the omni track and the Spi H 250 trackers to complement the dirt track coupled with are expanding smart track software offerings will be such key growth enablers for us.
Finally, we expect all of this to be met with increased profitability as we finally gained an understanding of the value timing.
P&L location of the various irna benefits.
Oh, while we obviously are disappointed in the amount of time it is taking to get clarity.
We will continue to execute on the things we could control to ensure we remain incredibly well positioned for the next phase of solar adoption, which is a theme that I will dive a little deeper on as we move to slide five.
As I mentioned before the performance this quarter was not by accident.
<unk> has undergone a long path of improving all aspects of the way it does business.
Numerous incremental improvements the company has made add up and allow us to not only minimized risk, but also to capitalize on opportunities as they arise.
I wanted to point out some of the key areas, where we have made these incremental improvements and also now that I'm just passed by one year anniversary provide an update on what's some of our new focus areas will be as we look forward.
This quarter marks are six consecutive quarter gross margin expansion.
This continued expansion was anchored by the change to our contracting framework, where we.
We minimize the risk of fluctuating commodity prices.
Since the initial rollout of this process.
We have continued to improve upon it we've added more strategic suppliers increased our visibility to longer term cost inputs and has created opportunities to find additional cost productivity and places like logistics and indirect spending.
We will continue to find ways to improve this process, but we believe as constructed now it offers us a competitive advantage.
This quarter. We also saw the margin of Sci improved by over 1900 basis points from the same quarter last year.
If you remember.
Last year at this time, we outline the issues that we needed to address to return the margins to historical norms in that business.
They included improving their purchasing and logistics processes, simplifying their product portfolio and rationalizing their offerings related to construction services.
A year later I'm happy to report that we have made significant improvement in each of these areas.
The purchasing and logistics processes and Sci have been aligned with legacy array and now allow for better predictability reduced working capital needs and cost improvement.
As previously noted we've also significantly reduce the amount of construction work that we do in this business.
We now are only performing this activity, where we have proven experience and a clearer ability to do so.
And where it is strategically critical for our customers.
While we were met with some unexpected challenges early in our integration at.
Mid year 2022, we brought onboard additional resources and experience and acquisition integration and now it couldn't be more pleased with where we are today.
We have also driven functional excellent people process and tools.
Every functional area has the proof point, but.
But a key example is the 400 basis point improvement we have seen in our past two percentage year over year that was driven by improved demand and logistics planning as well as better operational execution within our own manufacturing facility.
This reduction in past two is important because it affords us the opportunity to accelerate shipments at the end of the quarter to meet customer pulling requests.
We have also focused intently on delivering product offerings that meet our customer needs.
I spoke to this in more detail last quarter, but it's worth reemphasizing that the introduction of the omni track and the Sci H 250 in the U S. Combined with an expanded smart track offerings greatly expands the solutions, we can offer our customers.
Finally, as I mentioned when I first came to a ray it was critical for us to focus on our working capital efficiency to return the company to a position where it is consistently producing free cash flow.
In the last 12 months, we've driven numerous initiatives that have had meaningful impact.
First we have introduced an inventory optimize our tool, which uses data and analytics to ensure that we have the right amount of inventory on hand, which is greatly minimize the need to carry unnecessary safety stock.
But just in case high levels of safety stock, where key reason for our high cash conversion cycle during much of 2021 and early 2022.
Next.
We have partnered with our suppliers to introduce more standardized contractual terms.
These terms not only include slowdowns, a key ESG requirements, but also offer more consistent payment term provisions, which provide for better predictability of our cash outflows.
And lastly, we have made some simple, but impactful changes to our <unk> our process.
These include simplifying contractual billing terms to eliminate confusion with our customers overbilling milestones.
We have also done a better job of integrating our collection processes with our other customer facing organization.
Eliminating the collection silos that has led to improved customer engagement and collection timing.
All told the focus we have placed on these areas has led to a 38 improvement in our cash conversion cycle and approximately $300 million of the <unk>.
Mediate liquidity between our cash on hand and revolver availability.
With all the work we have done we certainly know that the job is far from finished.
As we move into the next phase of our growth lifted some of the new focus areas that will be driving in the quarters to come.
First we have invested in digital transformation of process improvement.
We recognize that this has led to a temporary increase in the amount of SG&A that we're spending we very much view these as investments to drive efficiencies and improve scalability in the future.
So as we move forward, we will focus on executing on this operational leverage and reducing our spending as a percentage of revenue.
Next.
As our profitability in cash flow have improved greatly we need to evaluate and update the market on our capital allocation strategy.
We will provide a more detailed plan in the quarters to come but for the time being we will focus on improving our financial metrics and identifying opportunities for strategically paying down our debt.
We are intensely focused on ensuring a flawless rollout of our new product offer.
And the last year, we have created a robust product management organization and under their guidance, we will ensure that once we fully launch into the market. We are prepared to deliver at scale.
And finally, we.
We have all hands on deck to ensure we strengthen our internal controls inbox we've.
We've already made key changes in third party partners and have added significant resources and tools throughout the organization to drive improvements.
This is very much a companywide efforts and we are committed to driving excellence in this area and.
And with that I.
I will turn the call over to nipple for a more detailed discussion of our financial results in an update towards 2023 got it. Thanks.
Thanks, Kevin.
Please turn to slide Senate.
Revenues for the first quarter grew 25% to $376.8 million compared to $300.6 million for the prior year period, driven by both an increase in the total number of megawatts shipped by 10% from three gigawatt to $3 three gigawatt and an increase in ASP, a 14% from nine nine.
From one to $11.04 per watt, resulting from improved pass through pricing to our customers.
The $377 million in revenue reflects $305 million from the legacy of Ray segment and $72 million from the Sci segment.
Gross profit increased to $101.2 million from $26 $6 million in the prior year period due to a combination of higher volume and improved gross margin.
Gross margin increased to $26, 9% from 8.8%.
Gross margin for the legacy of rape business, plus 27, 4% and the Sci business had gross margin of 24.9% in the quarter.
The margin of $26, 9% exceeded our expectations as in benefited from the favorable project next one time benefits from lower than expected logistics costs.
And the project next time, we have discussed previously that we manage a portfolio of projects projects.
<unk> can range and margin depending on a number of characteristics.
We are constantly balancing projects on the upper and lower end of the spectrum.
And the first quarter, we happened to deliver on a number of projects around the higher end of our portfolio from a margin perspective.
As you would imagine with any portfolio did not necessarily anticipate this favorable mix. The continued throughout the year as we will see this makes revert back to the knee.
Additionally, we had a gross margin lift from one time logistics benefits at ocean and domestic transport rates drop faster than expected.
Do expect this dynamic to normalizing feature quarters as we have reduced our cost assumption in our customer close to match the new rate environment.
Operating expenses decreased to $53 $70 million from $64.9 million during the same period in the prior year.
Decrease is primarily due to lower Spi acquisition related amortization expense. In addition to Sci integration costs in the first quarter 2022, do not repeat in the first quarter of 2023.
Net income attributable to common shareholders, but $13 $6 million compared to a net loss of $37.5 million. During the same period in the prior year and basic and diluted income per share with nine.
Compared to basic and diluted loss per share 25 during the same period in the prior year.
Adjusted EBITDA increased to $67 million compared to approximately 700000 for the prior year period.
Adjusted net income increased to $37.3 million compared to adjusted net income of approximately 500000 during the same period in the prior year and it just a basic and diluted net income per share was 25 cents compared to adjusted diluted net income chair for share of less than one during the same period.
In the prior year.
Finally, our free cash flow for the period was $41.9 million versus the use of cash a $52.5 million for the same period in the prior year.
The increase was driven by both improve profitability and the improvement in our cash conversion cycle of 38 days that Kevin previously mentioned.
Now I would like to go to slide eight Brian will discuss our updated outlook for 2023.
For the full year of 2023, we now expect revenue to be in the range of $1.8 billion $1.9 billion, a reduction of $50 million from the top end of our original guidance.
Kevin mentioned this is merely a reflection of the ongoing delayed in the IRL guidance, but kept cost projects to push out of 2023 and into 2024, and a temporary slowdown and orders.
However, despite the reduction to the top end of our revenue guidance, given the first quarter tailwind and the strength of our margins in our order book, we're still holding our original adjusted EBITDA and adjusted EPS guidance.
The remainder of the planning assumptions, we previously provided remained intact.
Although with the reduction in our revenue expectations, we will obviously look to moderate our SG&A spend on the lower end the range that was previously provided and.
And finally looked.
Looking forward to the second quarter, we expect a revenue increase between 15% to 20% as we hit a seasonally higher delivery quarter, but we do expect consolidated gross margins to average in the low twenties for the year as we normalize our project mix and do not have the benefit of the one time logistics increases.
Now I'll turn it back over to Kevin for some closing remarks.
Thank you and the book.
While the delays in the IRL guidance of obviously caused some short term disruption.
Encouraged by the engagement, we have seen from legislators and administrative officials as they work to find the right language.
Taken as a whole.
We will take nine and a half years of a well written set of regulations as opposed to 10 years for the risks.
So we are not losing sight of the bigger picture and continuing to position ourselves in the best possible way to take advantage of the growth to come.
We look forward to updating everyone as we all learn more in the coming months and.
And with that operator, please open the lines for questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad.
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Four participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
In the interest of time, please limit yourself to one question and one follow up thank you.
Our first question comes from the line of Brian Lee with Goldman Sachs.
Please proceed with your question.
Hey, guys. Good afternoon. Thanks for taking the questions you know maybe just starting with the.
Project delays I appreciate all the additional 30 there.
One one quick question on that.
It sounded like it was predominantly driven by one project is is that fair or was it multiple projects and then maybe you know just more before looking question to funnel a lot of focus around that obviously their weight and maybe quantify.
Giving me pull the bookings opportunity. That's you know being held up waiting for I R. A clarity and then I feel like yeah. That's every every quarter, but is there enough lead time, maybe level set. It says two if you see bookings you know it may June and July sort of what's the timeframe you might be able to actually see I need packed in 2002.
Three three if you start to see that funnel move.
Move forward as it is being kind of you know held up or you know pent up demand at the moment.
Yeah, Hey, Brian Sniffle.
Primarily was one large project that shifted that reduce the volume and as far as as we look out.
Continue to have conversations with customers on pipelines and available Gigawatts. It's just a matter of clarity is Kevin sat in his prepared remarks.
It's really beneficial engine get clubs, what we believe to be close on the guidance from treasury that some of these customers hold off on actually.
Penciling the order so you know.
Lots of conversations happening we feel good about the activity that's happening. It's just stop you know just for pending a few things to get over.
Over the line here before these things come through the funnel.
I mean, certainly as we're as we're with our customers. They are talking about obviously increasing volumes of business that are quite substantial.
We're just again holding pattern to get them to translate into orders received by us.
Alright, seven up and then I guess again on the I R. A benefits you mentioned <unk> your prepared remarks, you're expecting increase profitability.
You know going forward as you as you get some of these credits uhm.
The legislation I know, it's still early but any sort of range of expectation down how much uplift he could see based on your current understanding of the I R. A credit then also conversations you're having with your suppliers and then maybe also an update on how you think specifically your client product will be treated uhm.
In the context of this credit.
Yeah, I think it's still premature for us to comment publicly right to be honest. We've said that will continue to hold back on commenting and quantify again. So we have that level of clarity and I think we're still in that mode honestly to just.
Wait until we have that level of clarity, they're still the the main buckets that we're still focused bonds. Obviously the definition of made in the USA and what that translates to in terms of additional pricing power or ability to increase our bill of material content.
We've talked about the steel and the portion that that has to deal with I would say historically, we've been pretty open on the call and say, we expect to get at least a third of that.
I would only say in more recent conversations I think it'll get better than that.
I think lastly.
Relative to the clinic.
Certainly focused on working with the legislators to ensure that the definitions are correct and inclusive of all those fascinating systems that we would want.
And we're hopeful event, but again until that clarity is done and inked and available.
We're just not gonna be able to quantify that for you just yet but.
We all know it's substantial it's healthy we're working on it we're focusing on everything we need to do operationally to maximize.
But we just need that clarity definitions first.
Our next question comes from the line of Mark stress with J P. Morgan. Please proceed with your question.
[noise] great. Good afternoon. Thanks for taking my questions [laughter], maybe I'll take the the other side of Brian's question there and.
If we go.
A few more quarters here with no iras guidance.
Can you just talk about the ability to hit the the low end of the revenue range. This year I'm, just trying to figure out how derisked that might be.
Yeah, I think we feel pretty good about that because we used a similar process. We've done in the past, where we've got an order by order.
Communicated with our customers understood potential for delay understood modules all of the above so I think we feel.
Fairly good as good as we can sitting here today, but that low end of the range is an accurate low into the ranch.
Okay. Thanks, and then you spent some time talking about the.
The operational improvements and the impact on gross margins it understand what you're saying about the logistics costs being kind of more of a a timing issue one time issue in that you're you're reiterating. This this low twenties kind of somewhat vague [laughter] guidance.
Can we read your your commentary, though without the operational improvements to be that you're you're seeing kind of slight improvements in what you were talking about a couple of months ago on the last call.
Yes, absolutely.
Perfect. Okay. Thank you.
Our next question comes from the line of Julian Tumlin Smith with Bank of America. Please proceed to your question.
Pardon me.
More about the time.
How much of a knock on effect that we get domestic contents. It a few months will we get in terms of <unk> do we actually get more of these projects kicked out. The 24 hour you said differently, how much will work will need to be ready to get going pending that clarity of that point I just want to understand how much of a of of a needle move or there would be still at this point.
23, 24 to the extent to which we get clarity.
Or is it really firmly out.
Yeah, you know look I guess, the only point of reference a fact that I have is the conversations I'm, having with with my top customers and my sales team I was with one of our largest customers just yesterday in fact an ad.
Their order books are bigger than they've ever been what they are working with there designing with their engineering too right now are bigger than they've ever been but their conversion of that pipeline into actual orders placed upon us is what's delay right because you have both the the financier develop.
<unk> all looking at how do you put a package together to maximize every bit of that return under the I R. A and I think it's our belief that once there's clarity that conversion is gonna move fairly quickly I mean, it's not.
I don't think it's going to take months and months to convert I think it's going to convert very quickly.
Quarter.
Those things will start getting couple of boost.
First clarity.
So I think I'm pretty good about it.
Right.
And then related then I mean thinking about this being effectively a delay in transposed into 24, I mean, how much could we'd be looking at in terms of a record order books and be some of that trip from 23 to 24 now mean, how are you thinking about that dynamic here.
I mean, we're thinking that as it stands now we're hopeful of getting that level of clarity within the quarter second quarter, maybe it spills over a little bit into the third quarter.
But even then that allows us to convert it early in 2024 given are currently times in cycles right. So.
So it's not like look I I'm hopeful we don't have to wait until the end of Q4.
But we think it's going to come a little bit sooner than we think we're going to be able to capitalize on it or supply chains ready for the volume we're ready for the volume so hopefully it converts in control and revenues fairly quickly.
Alright, Kevin so it sounds like you're assuming kinda tended to Q3 Q resolution as part of your baseline for the Guy that does that.
Yeah, that's excellent thank you perfect.
Our next question comes from the lineup Christine show with Barclays. Please proceed with your question.
Hi, Thank you for taking my question. So maybe if I could just start with the I R. Eight for customers, who are looking to hit that 40% <unk> content I'm sure they'll come to you and want as much as the product domestically.
Hospital and I can only think the expectation at this time in fact customers get their domestic out or do you get your 45 X credit and there isn't really any sharing each side has their own credit [noise].
So who knows how casually I'll come out but in the event that the bar I sat high from a dwarf how do we think about what you would do with the customer is saint requiring a tracker that is requiring steal from the U S. Because they don't think that they can get the 40 per cent anyway does it generally makes sense for you to still domestically source as much as possible and and get the four.
35 X credit and if so should we think that the customer is kinda wanna sharing that credit.
Yeah, I think what we're seeing Christine is where customers say they have a.
Certain volume of supply of domestic panels right that we all understand who that is and they're sold out for many years to come here right.
And then they have an ability to get certain elements. So if they pay the prevailing wage with an apprenticeship program and the labor contracted on the site to engineering services contract. It on the site, which means that they could easily get to that 15% to 20% through those buckets with a tracker, maybe another seven to nine points and.
And it allows them to to.
Two for lack of a better word share their domestic panels between multiple sites. So what we're talking to customers about is that they will they will use a first solar panel 100 per cent exclusively on site. So use the amount they need to to hit that 40% threshold and spread those to multiple sites to get up to 40%. So that's why the domestic tracker becomes.
So important it's not as binary as look if I can't get a domestic panel I can't get it there will be an ability to hit it by spreading out your domestic panel alignment between multiple sites.
Okay, so mixing and matching essentially.
Correct and again, that's where the array has a a great advantage and the flexibility of our system.
Okay.
And then just song or S T I.
I don't have.
So your backlog Wang from 500 to 300, when only $72 million was <expletive> I think it would imply that you were fucking since negative for the corner or something is that without a project that was cancelled here.
No that's just take Chrissy in April .
Browning's issue, because we get the number and hundreds of millions right. So it's essentially was flat Ah for Sci and it mainly due to timing do you still feel good about the overall Sci forecasted you see we have not updated that.
We didn't bring anything down from the Sci revenue forecast.
The timing of bookings just led to Q2, not being a large bookings quarter.
Thank you.
Our next question.
It comes from the line of <unk> with Roth Capital. Please proceed with your question.
Hey, guys. Thanks for taking my questions just wanted to talk through bookings a little bit more here as it relates to the twenty-three guide I know you touched on this a little bit but to what degree does that assume new bookings in order to hit.
The low end up the guidance.
Do you do you need and how much do you need in order to get there or do you have all the orders in hand.
Take out loan next bill it would be very little.
Most of that.
One point of guidance is enhanced.
[noise] proportionate amount of it is in hand at this point.
Great and then can you talk through your multi year framework deals.
Are those discussions happening actively.
Are you close to getting some of those done or more of those done and do you think and once we get the.
The guidance from Treasury.
Can you talk about what kind of a celebration of bookings we could see can you quantify it in any way relative to either current levels or even prior levels of your historical four to 500 million a quarter could we see a multiple on top of that.
Yeah.
As far as the first part of the question gas.
Discussions with with several customers on multi year well. Thank you black heartfelt pipelines and those continued to yep. That's Kevin mentioned in the prepared remarks, those those are strong.
Strong conversations and on top of the top of the funnel type of discussion so soon.
As soon as that guidance comes out we think those will also move and accelerate as far as bookings up you know, it's it's hard to say right now what that peace will be once once we get clarity from Treasury. However, we do do feel that it will accelerate when we do get clarity on the on the domestic.
10, it's just it's just hard right now to say how much that would be.
Guys with what you have to remember is that our customers are trying to figure out how much.
They have to give ray.
Under different definitions of domestic content, that's one of the big challenges right.
Under one extreme definition, we have to get a disproportionate amount of their business on the other thing we're fairly equal with our.
Our peers right.
So we're no worse off but.
We're dramatically better so those customers have to understand.
What that looks like because again there will be some.
If the domestic concept goes an extreme way, there's likely going to be some additional cost to maximize from 76 up to over 90% domestic content and whether or not they need that how much they need to pay for that we have to have those definitions before those orders get set in stone and launched and that's part of what's driving us.
It's not unexpected. This is this is where we said we'd be.
We'd hope for clarity by now, but it's simply hasn't happened yet.
Thanksgiving.
Our next question comes from the line of Kashi Harrison with Piper Sandler. Please proceed with your question.
Mmm, Yeah, good afternoon, everybody and thanks for taking the question. So Kevin people just wanted to make sure. We're all 100% on the same page.
Is it just the domestic content that your customers are waiting for are there are perhaps other definitions from treasury, maybe around prevailing wages order French superpowers or something else that your customers are waiting for.
It's all of the above that adds up to that the ability to get to the 40% domestic.
Domestic content right, they're looking for clarity every one of those buckets final Guardian. For example, there has been some discussion earlier about whether or not.
There's a a sliding scale under the prevailing wages over a couple of year period under under the apprenticeship program for example.
<unk> as you demonstrate you are on the way to do it a year or two you have those are the kind of definition, but they need to figure out so they stack up each of those elements to see how they get to the 40 per cent and.
And how important that track or is going to be to get there.
Ah got it that's that's that's helpful. Thank you and then as my follow up can you just speak to the broader demand trends you seen in Brazil, Spain for the F. B I business elections are behind us in Brazil, Spain supposed to be quite strong to see her. So just what are you seeing on the demand side, maybe talk about market diabetics market share et cetera.
Yeah, we felt really good about Brazil, and the demand. We're seeing there is is very strong.
Feel good about our market share in Brazil.
The backdrop, our ability to deliver I think Brazil is going to be a great success story force. This year in Spain, we're still waiting for additional incentives to come through Europe . I mean, it's a it's a good business, it's doing well, but the acceleration in Spain nearly be as much as Brazil in the near term.
Oh, it's really more about waiting for additional incentives throughout Europe .
But to be clear do you think he would like does this yesterday I business in Spain is really focused outside of Spain, we're focusing all throughout eastern Europe or other regions, where we know we've got a great play for that product line right now that are still very healthy.
Thanks for that color there if I could just make one more quick one in is there any way to quantify the the magnitude of the one time logistics benefit that you had this quarter.
Yeah, Hey, calcium in April so that's about about a couple of hundred basis points that was an impact update logistics and free of cost.
Our next question comes from the line of my Heap Metalloid with Credit Suisse. Please proceed with your question.
Hey, good evening, thanks for taking the.
Just to clarify.
You're expecting.
Codification from the end of two too early to three but that's not the guidance does that does that sound right.
Yeah, you have to eat this nipple, yes, we are.
That's our current expectations and Q2 sometime in Q3, and you're correct. We have not updated the guidance for any impact of Iraq.
Gotcha and then.
Once you get that tradition, how much more capacity did you have.
To meet any.
Incremental customer demands in Q4.
We felt really good on an annual capacity and a quarterly capacity basis.
Building out our capacity.
For a good 18 months now an attic, many morton suppliers throughout the U S qualifying them getting them up to speed. So I think we feel really good about our domestic capacity.
To handle whenever volumes coming away and keep in mind that when that volume comes our way, it's not they're not all going to rush for queue for delivery to declare these these larger probably the programs are getting larger and larger.
The number of them are getting more and more and there'll be phased out throughout 2000 2000 for their.
There may be some opportunistic programs that you get yet for delivery in queue for but I think the vast majority of what we would expect to come in from Iras is going to be a 2000 to 2400 for them.
And then just maybe just lump lost one from me.
Talked about pushing.
Pushing or projects because of Iatric notification, but all that often.
It did not meet any domestic content.
So our main care to repeat that again sorry.
All the customers.
Products for which.
They don't need any clarification on domestic content what are they doing how does the rest of the project the more deal with them.
A few things.
They have to be clear, we've had customers say, they're not worried about that 40%, they're just going to continue to go and build so some are doing that some of the orders that you do see is getting in and do executing are executing on so not everybody's waiting to maximize all elements under the irate other customers and developers are saying, we get it we have a good enough return.
As I said one of the best quotes from one of the seat you also have a large customer will let the lawyers and accountants worry about get going after those credits later, we're in Bilbao right. So.
There's different behaviors, obviously on to our customers.
Our next question comes from the line of calling Rushworth Oppenheimer. Please proceed with your question.
Thanks. So much has can you just give us an update on the work that you've been able to do with any intimacy P seats in terms of qualification designers, particularly outside the U S.
Can you repeat that again sorry.
Yeah can you give us an update on <unk>.
Qualification and designs with E. P. C's outside that you also I'm just curious about the number of folks that are working with in Europe , how that's growing and trembling and in Australia.
I'm being Australia has a unique animal under the <unk> program, where we are.
We're certainly getting qualified.
As domestic content, leading to additional new volume force. There I think the rest is look it's you're hard pressed to find an ATC around the world and we haven't done something within our existing markets.
Oh, it's not like we are redeemed qualify ourselves with a lot of new epc's.
The market that we're currently participating in we've done work before and we have a steady steady strong relationship with existing upc's.
And also you know we with our strategy of just getting closer to developers they they take us into various regions and markets that we found the relationship with ATC. So that that continues as well as we expand into different regions.
Okay. The Super helpful. And then just from a competitive standpoint can you talk a little bit about how much per sensitivity. There is right now with folks and if there's any sort of meaningful change in the price competition and and how that that's working for you and see your best friend for that project.
Yes.
As far as that we're seeing we're seeing the normal competitive behaviors in the market obviously.
You talk about R. S piece of health.
In the corner, we feel bad about that but nothing unusual or seeing tolerant in that regards.
Although I'll tell you that most of the impact on NASP on a sequential basis is just.
Related to the steel inputs costs, both better changing and we're mindful that as we go throughout the year.
It was still being predicted to decline here in Q3 and Q4. That's also part of why you bring your revenue down cause you could expect to pay Sp's may declined slightly going into Q3 Q for for the same volume of business right. So we're mindful of that but outfitting that aside we haven't seen any demonstrator.
Changing and pricing behavior of our top competitors.
Perfect. Thanks, so much for us.
Our next question comes from the line of Joseph.
Sure with Guggenheim. Please proceed with your question.
Hey, there one thing we haven't talked about those as much as we get into next year, a new thing to worry about the the tariff more touring goes way.
June panels has to be put in service by the end of next year.
To qualify so I've been talking to some folks who we're talking about real rush.
To kind of get all that done I'm I'm curious as to whether you're beginning to hear about what it's gonna be like managing that process and how it might impact your business as you get into the latter part of this you in the first part of 24.
We really haven't had any of our large customers come in and talk to us about that being a big issue yet.
We're reading the same things you are where you understand their baby.
There is a potential for that to occur, but we haven't had our customers rescuers and kind of lack of a better word lockdown capacity in the near term there are more focused on that iras overall benefits and they are the tariffs under ACD ADT.
<unk> right, but to clarify it is true right that any panel that comes in under the tariff more tourism by June has got to be placed in service by the end of 24, that's that's correct yes.
Yeah, that's that's our understanding of it yes.
It's been interesting. So you haven't your customers aren't talking about that they've got other stuff to worry about okay. Thank you. Thank you very much.
Our next question comes from the line of Donovan's Shaffer with Northland Capital. Please proceed with your question.
Hi, guys. Thanks for taking the questions I want to start off I'm just ask for.
The bookings being down quarter over quarter.
When you report bookings do you make an adjustment for changes to the costs that you were able to pass through the customers I mean with steel prices logistics of all that stuff.
Was there a reduced sort of S T impact.
Sometimes at the same megawatts, but now you say well when we do shifts this what we're going to have to pass through that ends up as revenue that's going to be lower.
At this point is that a factor.
No because again, if you remember our contracting process, we're locking that in at that point in time right.
Okay. So so none of it sort of stays floating like locking certain portions in and then a certain portions days floating until like the shipment days it doesn't work like that.
No we're doing at the full price for the program.
Okay, Great and then in terms of the one off impact on gross margins. You may have said, there's some perhaps I just missed it but was that primarily on the legacy of Ray's side or was that also a factor with the Sci gross margins.
Is primarily on the legacy array side majority of that was on that and as mentioned in my prepared remarks. It was the right logistics cost a couple hundred basis points and those also project mix.
Our next question comes from the line up trusted in Richardson Scotia Bank. Please proceed with your question.
Hey appreciated guys just maybe following on the Sci question, the gross margin improvement there.
It sounds like nothing necessarily one time, there, but did that benefit necessarily from mix as well or should we really think about the margins. In Q1 is representative of the process improvements that you guys highlighted in your prepared comments.
Yeah that was primarily due to the to the that makes it the product and locations on where that was sold.
Okay appreciated.
The project mix again, if you remember.
When we talked about some of the lower margin U S projects, but had us at some difficulties with their margin throughout last year. We didn't do a lot of that work that close out work in Q1. So we benefited from a lack of that in Q1, we will have a portion of that and Q2 and Q3 that finishes and then I think we're back fully to our historical margin.
As in the SGI business, so we feel pretty good about what we've been able to do.
Again, a lot of it's been about leveraging the supply chain provided by the rain team into S. T I.
A lot of product rationalization, a lot of engineering work, there's just been a tremendous amount of work done on that business through the integration, we feel pretty good about where we're headed with it.
Makes sense, Kevin and then maybe just to your earlier comment on SG&A sort of a temporary increase in dollars, but over time operational leverage takes a percentage down just thinking about temporary that sort of a twenty-three phenomenon or or even just isolated do a couple of quarters.
Oh. This is this is a twenty-three phenomenon, where we've agreed to invest literally millions of dollars in additional infrastructure.
Infrastructure that allow us to scale and if you think about it in terms of having the ability to very quickly.
Rapidly design sites at this scale up that we expect under the Iras you can't just keep throwing bodies at the volume of business, that's coming down right. So we had to invest in some of the infrastructure that would allow us to take that volume in scale very effectively but that's the investment you see this year getting ready.
For that scale next year, so we feel pretty good about it coming down next year.
Our next question comes from the line of joining Levy, which Truist. Please proceed with your question.
He definitely low on for Jordan. Thanks for taking my question, it's great to hear that Brazil, and a spanking are still holding up nicely. So just one quick one can be backing for example, I'm just wondering in terms of the mix utility scale birth is distributed generation products. What have you seen so far the the mix changing.
Because your market and how are you position come Patty <unk>. Thanks.
Yeah, So I would say a lot of what we're seeing in the first six months of the year here is really utility scale.
That really goes on through Q3, I think we're starting to see a lot of inbound activity on the distributed generation as well.
And we're hopeful that will come in and Thats quicker turn it has an ability as it comes into to help us out here in Q3 Q for.
Okay, great. Thanks.
Our next question comes from the line of Alex Kenny out with Wolf Research. Please proceed with your question.
Great. Thanks, Good afternoon, I'm just curious.
Curious about how you are seeing the evolution of.
Kind of product mix from the discussions you are having has just been any trend towards if there's prices seem to be on.
For each 250 or is there a lot of adoption embracement of of omni track and just kind of curious about how you are looking at that.
In the next 12 to 18 months.
Yeah, I can I can tell you that both are really exciting for us. So we've had a tremendous amount of inbound interested in on the track and.
If I were to.
To guess as we go forward it will be a real large piece of the portfolio meeting, it's very very helpful and our customers are very appreciative of it I think since February alone. We've got over three gigawatts of all detract projects in various stages of the quotation process. So we feel really good about that.
We didn't get really launching beyond attracted to what we call our alpha sites here in Q3.
And then we just begin scaling them up and Q4eign into Q1 in terms of the size and complexity of the sites.
So we're just taking a very measured approach to launching that product we feel really good about the traction it's getting it demonstrated savings store and customers. So that feels really good again, probably the biggest part of that slow scale is really about some of the newer component pieces that it's taken some some time to get the supply chain up and up and ready to.
<unk> scale right.
Feel good about that.
And as it relates to the Ftaa's go ahead sorry.
Oh No no go go ahead sorry.
So and as it relates to the Sci H 250 in the U S. All I'll remind you that look today, we still can sell the the the Spanish version in the U S. Although we prefer not to yet just to chase an order for price point.
What we've really done us at our engineering teams from a ray worked very closely with the Spanish team and we will have a much better version of that product to launch in the U S. There's just a great story of the integration between Spi, an array product management engineering field engineering global sourcing working at changing that.
Product.
The first part was to ensure we could be at a price point, that's very very competitive with others in the market at that price point in that we could wind annually, we feel really good about that we simplified the product made it easier to install simplified the driveline reduce the the FK used in terms of the torque too.
We've resource the torque tube and a size that's more available readily from U S steel suppliers to ensure we can get U S content up so we've done a tremendous amount of work on that on that product and as we as we launch it in <unk> in early Q3 will expect to be shipped to get in queue for and I think we're going to have a really compelling product line to compete at a.
Different price point.
Great. Thanks, and then I guess just a a question just on cash flows.
You mentioned that there was thinking about capital allocation maybe.
Maybe that reduction.
Obviously decent limits them on the cash flow front I'm, just kind of curious about when you feel like you'd be in a position to.
To give a little bit more detail on on on on that I kept on location plan.
Yeah, it'll be coming to in the coming quarters as we continued to parenting good free cash flow numbers, we as we.
Get through our how high delivery quarters coming upcoming hearing <unk> Q3, I think we'll be in a good position in or near the end of the year to really laid out.
It's time for one last question. Our last question comes from the line of Derek Sonenberg with Cantor Fitzgerald. Please proceed with your question.
Yeah, Hey, guys just one for me I'm curious, if you're seeing anything changing from a competitive standpoint sounds like demand is there I would imagine.
Others are ramping up capacity to get ready to scale are you seeing a growing number of competitive bidding on contracts are more competitive price bidding.
Any changed what you've seen in the past any change this year on the competitive landscape. If you could provide some color on that that'd be great.
It look we really haven't seen a substantial amount of changes from our from our top competitors. This year.
There's been some dialogue about.
Competitors are getting more strict on the terms of business fell except obviously with you publicly traded you'll have to do that so we expect that to occur.
Other than that that's been the commentary from when I'm talking to our customers.
God Thanks, guys.
That concludes our question and answer session. This does conclude our teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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